How does cryptocurrency work?

 Blockchain as a basis for a Currency

The History of the blockchain is strongly connected to the history of Bitcoin; therefore, a lot of people confuse those two and might even take it for the same. In 2008, Satoshi Nakamoto published the White Paper “Bitcoin: A Peer to Peer electronic cash system”, which is the foundation for Cryptocurrencies today.

Most Cryptocurrencies are based on blockchain technology. This technology is based on four main characteristics.

Firstly, the decentralization, meaning that the data is not saved on a single computer/server in only place. On the contrary, most blockchains are saved on millions of computers simultaneously.

Because of that, the blockchain cannot be changed. Once a transaction is confirmed on the blockchain it is nearly impossible to change the saved information. (To change it, all nodes where the blockchain is kept, would have to be replaced simultaneously.)

The underlying principle is called consensus, meaning that the community has to agree on what happens and what does not happen. One way to reach this consensus is called “mining”. It is part of the proof of work system, which we will discuss in the next chapter.

Another critical point is transparency. In almost every Cryptocurrency, transactions can be tracked, and users can see who added blocks in a “proof of work” system.In some cases, there also is a “Rich-List” stating the addresses with the highest amount of coins.

(This can be helpful to see how well the coins are distributed. This does not mean that people can see the name of someone! The only visible information is the public address.)

Lastly and probably one of the biggest threats to the old financial system - the transfer of values. While banks take one business day or even longer, depending on the size of the transaction and the destination, values can be shifted a lot faster with Cryptocurrencies. (10-30min, or even instant transactions are not rare anymore.)

Regarding this, the transaction fees can be 0, so that means the consumer does not need an intermediary. (Those points will be discussed at a later stage in more detail.)

Before reaching the functional part of blockchains, we will have a quick view of how the blockchain recognizes accounts and how they are used.